Journal of Operational Risk
ISSN:
1744-6740 (print)
1755-2710 (online)
Editor-in-chief: Marcelo Cruz
![Risk.net](https://www.risk.net/sites/default/files/styles/print_logo/public/2018-09/print-logo.png?itok=1TpHrpuP)
Implementing a Bayesian network for foreign exchange settlement: a case study in operational risk management
Kwabena Adusei-Poku, Gerrit Jan Van den Brink, Walter Zucchini
Abstract
ABSTRACT
Managing operational risk (OR) at the “micro” or business unit level is rather difficult due to the insufficiency and backward-looking nature of historical loss data. A Bayesian network is able to circumvent this difficulty. It can be used to model the causal relationship between risk factors, key risk indicators and a desired operational risk attribute for a specific process. This paper outlines the steps taken to construct such a model to manage OR within the foreign exchange settlement process of a bank. Direct checks on the model carried out using available historical loss data indicate that the frequency and severity distribution generated by the model had a slightly larger mean and fatter tail, respectively, than the observed. The model can be used to estimate the value-at-risk for the process and also to perform scenario and sensitivity analyses, which can reveal the types of changes and interventions that would reduce OR within the process.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net